Tied Aid and Drug Procurement: How US taxpayers’ money is wasted on condoms and other drug procurement and why the situation won’t easily change

“USAID has bought some nine billion condoms and HIV prevention programs since the mid-1980s. Most of them come from Alabama, at a cost of around five cents each. The American taxpayer then pays to ship them to countries like Indonesia, India and China, where they would have cost two cents a piece to buy. Americans have spent US$270 million more than they needed to on condoms” (The Wisdom of Whores, p283)

The quote is taken from the book The Wisdom of Whores by Elizabeth Pisani and it sheds light on the perverse effects created in the public health sector by tied aid. Money is wasted by American taxpayers and at the same time the capacity to produce locally is constrained (local production has often the additional advantage of securing a long term availability of supply when the donors pull out the funding). Who stands to win are the American factories producing the drugs and their workers. Clearly a minority compared to those that stand to lose. This paradoxical situation begs the question of why, if the majority stands to win from changing the status quo, nobody is changing this situation?

One hint: the people standing to lose are the minority and can more easily identify themselves as the losers in case any reform is proposed. Therefore they will organize and voice their concern to the local congressman and senator and block any attempt to change things. The benefit is clear: saving a handful of American jobs. On the other hand, the people standing to win (taxpayers) have little clue on how their money is used (or wasted in this case) in the first place, therefore they won’t stage any public demonstration in support of reform (e.g. source condoms locally) that could ensure a better use of their money. Similarly, workers at condom factories in Asia (other winners) have hardly any relevance in the American political debate. Result: no American politician considers it worth taking the political risk of proposing a reform of the procurement that could save a lot of money (see here for more on the protection enjoyed by condom producers in Alabama).

Steven Suranovic has an excellent explanation about why protectionist policy ( in this case securing contracts to American condom producers) are so difficult to be repealed. As he points out

“Free trade will generate recognizable and uncompensated losses primarily to import-competing firms (…). Protection of these industries would recognizably eliminate these uncompensated losses. In contrast, protection would generate losses that are either difficult to recognize or are too small per person to rally opposition.”

In our case the protection of import-competing industries consists in tiding the aid so that condoms are purchased from American manufactures. The recognizable benefit is the conservation of American jobs. On the other hand the unrecognizable losses that protectionism causes are the money paid by the taxpayers. As a result, aid is not untied, condoms are produced 20,000 miles away from where they are used and a lot of money is wasted. Hardly an optimal situation.